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Bank of England raises interest rates: What the City is saying

Bank of England raises interest rates: What the City is saying

Frances Clayton | November 5, 2017, 0:13

Bank of England raises interest rates: What the City is saying

Lloyds has also admitted that a rate rise was not on the cards for its 22 million current account holders, many of whom will use these accounts for building up cash savings. They're likely to be in for a shock.

Because this won't be the last rate hike. But the move has major significance in economic terms.

Bank governor Mark Carney said: "With unemployment at a 42-year low, inflation running above target and growth just above its new, lower speed limit, the time has come to ease our foot off the accelerator". Either way, more rate rises are expected at some point but we are talking about baby steps, a quarter per cent at a time. So we are all a little bit worse off.

In a statement Thursday, the Bank of England said it had increased its benchmark rate to 0.50 percent from the record-low 0.25 percent.

Bank of England policymakers voted by a majority of 7-2 to raise rates by 25 basis points from a record-low 0.25 per cent after a regular gathering, mirroring policy tightening seen in the USA and eurozone.

Within hours of the Bank's announcement Lloyds, Barclays and Halifax announced their tracker mortgage rates would increase in line with the rate rise.

"The reason why we've got additional rate increases in our forecast this time is because of the lower productivity profile", Amit Kara, head of United Kingdom macroeconomic forecasting at Niesr, told reporters.

Britain's 12-month inflation rate accelerated in September to 3.0 percent - the highest level for more than five years, recent official data showed.

"No further decisions have been confirmed yet regarding our other savings accounts and mortgage products".

Economists said the rise was unlikely to have a big effect on the economy, because rates are still at the lows seen since the financial crisis.

Nearly four million households face higher mortgage interest payments after the rise, but it should give savers a modest lift in their returns.

It's not very much, but Stuart Farquhar at the University of Wolverhampton is anxious that, for many families, it won't take much to put them in serious financial trouble.

"Overall, the Bank may have hiked rates, but the outlook is cautious and downright weak regarding the strength of the United Kingdom economy", said Kathleen Brooks, research director at City Index. If the rate rise goes ahead, this could have a positive impact of the British currency.

"Conservative borrowers with bullet and/or amortised debt will have hedges, caps or collars in place for interest costs to protect them from a rising interest rate environment". That's more than markets are now expecting and more than the institute forecast in August. However, he specified that the independent variable for that policy will be Brexit negotiations.

But it will offer some relief to savers hit by surging inflation and negligible returns.

He added that savers were expected to benefit from the rate rise. This proved correct, with inflation even falling briefly into negative territory two years ago.